Gold News Monitor
originally sent to subscribers on October 19, 2015, 7:59 AM.
Since Oct. 8, gold has gained more than $40, jumping on Thursday to its
highest in more than three months. Are we witnessing a great comeback of
gold, which will end the bear market?
Gold came back into favor. Despite a slight correction on Friday due to profit
taking, the shiny metal just erased its 2015 losses. Amid the recent price
increases, gold ETFs saw a surge in holdings (412,000 ounces in just two
days), which signals an improved sentiment in the gold market.
Why did many gold bulls return to the market? Well, the lack
of action at the FOMC September meeting, weak U.S. economic data (disappointing
September non-farm payroll report or stagnating
inflation and retail sales) and dovish
statements of the Fed officials damped expectations that central bankers
would raise interest rates this year. So, investors changed their perception
that U.S. economic growth is stronger than the rest of the world and, thus,
the U.S. central bank could tighten its monetary policy and diverge from the
Bank of Japan and European Central Bank’s easing.
But the U.S. economy, even though it still performs better than many other
countries, does not experience impressive economic growth. Actually, the
current expansion is the slowest in the U.S. history, and forecasts for real
GDP growth in the third quarter stand at less than 1 percent. Thus, the “U.S.
decoupling” narrative simply does not hold, especially with very weak
manufacturing and declines in the S&P 500. In consequence, the investors’
expectations for the first Fed hike shifted to March 2016. This is likely the
reason behind the U.S.
dollar’s decline this month (together with real interest rates). The
price of gold went up at the same time.
The bottom line is that the price of gold has recently gained
significantly due to improved fundamental factors. Reduced expectations of a
Fed hike this year led to a weaker U.S. dollar and declines in real interest
rates. If this trend in the greenback and real interest rates continues, then
we could even see higher gold prices in the following days. However, given
that the gold trade is generally about the Fed, any stronger hawkish
signals from the U.S. central bank could change the sentiment in the gold
market again.
Gold rallied this month – it’s a fact. However, there was a good reason
for it in the form of a change in the expectations regarding an interest rate
increase. Therefore, it doesn’t imply a lasting change in the investors’
approach toward gold – it’s simply a reply to the new information that was
likely largely based on a surprisingly bad jobs report released earlier this
month. Consequently, it could very well be the case that what was about to
happen based on the changed expectations has already happened and any
negative (for gold) comments from the Fed would result in a sharp drop of the
price of gold. Therefore, taking into account the fundamental changes alone,
it’s much too early to say that the bear market has ended or that its end is
near.
If you enjoyed the above analysis, we invite you to check out our other
services. We focus on the fundamental analysis in our monthly Market Overview
reports and we provide daily Gold &
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Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News
Monitor and Market Overview Editor
Gold News Monitor
Gold Trading Alerts
Gold Market Overview
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